Intel's 'tiny' problem

NEW YORK (CNNMoney.com) -- Decades of booming personal computer sales helped Intel become a chipmaking behemoth, but consumers' rapid shift away from PCs may leave the tech giant out in the cold.

As Intel's old marketing campaign proclaimed, the company's chips are "inside" practically every kind of computer, from PCs to Macintoshes to netbooks. But PCs are yesterday's news. Mobile Internet devices like smart phones and tablets are where all of the growth is but Intel (INTC, Fortune 500) hasn't been able to gain much traction.

Where Intel has so far failed, a little-known British company called ARM has had roaring success. ARM is to mobile devices what Intel is to computers -- the company develops and licenses the basic chip designs for practically all of the world's cell phones, smart phones and Apple's (AAPL, Fortune 500) iPad.

Tech analysts left and right are proclaiming that the mobile device market will outpace or perhaps even replace the PC market in the next five years. In fact, the market grew 56.7% during the first quarter, according to IDC.

Could a tiny British company that took in just less than $500 million in sales last year really be in a better position to take advantage of that forecasted growth than Intel, which had over $35 billion in revenue during the same period?

"Few companies have championed and invested in the shift to wireless computers and PC-like devices like Intel has," said Intel spokesman Bill Kircoss.

Analysts also say it's premature to dismiss Intel. "ARM is ahead right now, but I've become smart enough to know that Intel can't be counted out," said John Bruggeman, CMO of Cadence Design Systems. "Intel will figure it out, or it'll spend its way out."

How we got here

Next to Microsoft (MSFT, Fortune 500), Intel has perhaps been the greatest benefactor of the PC boom of the past three decades. Intel's patent on the x86 processor, which is required to run Windows, helped it become the biggest chipmaker in the world. Intel designed its chips for performance and power, making PCs lightning-fast and able to perform multiple complex tasks simultaneously.

ARM, meanwhile targeted a different, smaller market. By designing chips that use as little power as possible, ARM made its way into practically every cell phone on the market (about 20 billion mobile devices over the past 19 years, according to the company). Unlike Intel, ARM doesn't actually make chips, but licenses designs to 220 companies around the world, including giants like Qualcomm (QCOM, Fortune 500), Texas Instruments (TXN, Fortune 500), Nvidia (NVDA), Samsung and Apple.

Both companies were humming along until Apple introduced the iPhone in the summer of 2007. The iPhone was years ahead of any other phone on the market at the time, allowing users to carry a device in their pockets that performed PC tasks.

"There was a huge technological disruption that took place at the launch of the iPhone," said Bruggeman. "Now, mobile is the high volume category and it's the only one that matters. The only question is will it be Intel-based or ARM-based?"

Because of its vast experience in the mobile sector, ARM won the contract to design the iPhone's processor and has since appeared in a large number of smart phones. Apple's iPad also uses an ARM-licensed chip.

Atom bomb

The Intel vs. ARM battle is far from over. Mobile devices are rapidly improving, but none yet offer the same deep, rich Internet experience of a PC or run all of the complex tasks of a computer.

Next year, Intel plans to unveil a new "Atom" mobile device processor (code named "Moorestown"), which Intel thinks can outperform competitors and help it give ARM a run for its money.

First-generation Atom chips can be found in just about every netbook on the market. Though Intel offers the chips for smart phones, most devices with Intel inside only run the unsuccessful MeeGo platform. Intel so far has not been able to tap into the rampant success of Apple's iPhone OS or Google's (GOOG, Fortune 500) Android platform.

But the Atom 2 might change that. Though experts say Atom chips won't soon be found in an iPhone, Intel recently demonstrated its Moorestown chip seamlessly running Android 2.1 at the Computex technology expo in Taipei.

"In just the past 30 days alone, we've expanded this chip line to cars, TVs, tablets and smartphones and plan to keep bringing new, and even more power-sipping Atoms to market," said Intel's Kircoss.

Even ARM admits that its market dominance doesn't mean that it has won.

"People don't care what's underneath, they just want to buy stuff that they think is cool," said Bob Morris, director of mobile computing at ARM. "Intel eventually will be successful in this area, though they'll be one of many."

But there's one potential hang up for Intel: Compared to its traditional PC chips, the profit margins for the Atom chip are atrocious. A small number of analysts even suggested that Intel would like the mobile market to go away.

"Maybe Intel doesn't care who wins the mobile space," said Phani Saripella, analyst at Primary Global Research and a former Intel manager. "It might be better off defending its turf [on the higher end devices]."